Update on Water/Wastewater Impact Fees
In a previous blog, we discussed the pros and cons of implementing system-capacity impact fees for the water and wastewater systems in College Station, which are being considered later this month by the city council. If enacted, these fees would be assessed on new home construction to help pay the capital costs for expanding the capacity of the utility systems. This revenue would prevent the utility rate payers from subsidizing all the cost of infrastructure for the new development.
In January, we wrapped up the Technical Memo, which compiled all the capital projects that will be required over the next 10 years. Based on these future projects, we estimated that the maximum impact fees per LUE (Living Unit Equivalent) would be approximately $2,500 for water and $1,700 for wastewater. However, the Rate Credit calculations had not yet been performed.
What are Rate Credits?
When a new home is completed in our water or wastewater service area and the new resident begins paying a monthly utility bill, a portion of their payments will be used to repay bond debt. Over the next 20 years, this customer will have repaid a portion of the debt that was incurred to enable the water or wastewater systems to have capacity for their new home. If the impact fees collected 100 percent of the debt that was incurred, then this new resident would be double paying. So, we look at historic trends and estimate the new customer’s contribution toward paying off debt. The average capital costs are reduced by that amount, called a Rate Credit, to get the maximum impact fees.
What are the maximum impact fees after the Rate Credits?
This chart shows the Average Capital Cost, the Rate Credit, and then the Maximum Impact Fees:
The maximum impact fee amounts shown are the highest fees that could be enacted by the city council. Of course, the council has the option to enact impact fees at any amount less than the maximums, and that’s where the policy decision will be made. The first step in the policy phase is to get a recommendation from the Planning & Zoning Commission, since they have been appointed as the Capital Improvement Advisory Committee as required by state law.
What did the P&Z Commission recommend?
Staff suggested that P&Z consider recommending a modest amount of $400 for the water impact fee, and $400 for the wastewater impact fee. These amounts would recognize that our local economy is still recovering but also would help reduce the rate payers’ subsidy of new development. Staff recommended these amounts after reading a study on San Antonio done several years ago by the Texas A&M Real Estate Center. This study found that when San Antonio implemented impact fees in this range, new development was not adversely affected and the new development then paid for itself. The second part of staff’s recommendation was to reduce the existing impact fees, which apply only to specific utility lines, down to zero so that any development would not have to pay two different impact fees.
P&Z voted to recommend to council that the impact fees be implemented at zero and that the existing impact fees on specific lines be kept as they are. As the economy improves, the issue could be revisited to see if conditions warrant a higher impact fee. Implementing the impact fees at zero, rather than simply rejecting the fees outright, would preserve the findings of the impact fee study for five years. As a result, the issue could be revisited without having to completely re-do the study.
The effect of impact fees on utility rates
To provide a clear example of how impact fees could affect utility rates, our chief financial officer assumed that both the water and wastewater systems would require a $10 million capital project after collecting impact fees for five years. If the city paid $1 million cash toward the projects but borrowed the remainder with 20-year bonds at 5 percent interest, the chart below shows the rate increases that would be required in the fifth year:
As you might expect, if the maximum impact fees were collected, the required rate increase is cut in half when compared to no impact fees. Of course, if lesser impact fees are collected, then the result is a more modest reduction of the required rate increase. As you can see, the impact fees would keep utility rates at lower levels as the general rate payers reduce their subsidy to new development. These numbers are provided for illustration only and although they are realistic, they are based on a completely hypothetical scenario.
How would these rates affect monthly utility bills?
Of course, this depends on how much water you use in any given month, but looking at monthly bills that are average amounts of $35 for water and $27 for wastewater, the customer would save a combined $1.67 per month with the maximum impact fees in place as compared to no impact fees. Please keep in mind these numbers are derived from the hypothetical situation in the previous section.
Dr. Gaines briefs the city council
When the city council expressed concern regarding how impact fees could affect the local new housing market, we invited Dr. Jim Gaines of the Texas A&M Real Estate Center to provide a brief summary on the health of the local economy. Dr. Gaines reported that the Bryan/College Station area is doing well and that College Station grew 38 percent in the last census period. He said single-family building permits have been up and down during certain periods and, for the most part, the fall off has not been as pronounced as other areas of the state. The value of permits since 1994 is $122,000 per dwelling unit on average. Looking at the 2009 breakdown of the average household income in the community — assuming a 10 percent down payment, a 5 percent fixed rate and other variables – 42 percent of households in the area cannot afford to pay more than $75,000 for a home. Based on these assumptions, another 22 percent cannot afford to pay more than $125,000, and 64 percent cannot afford to pay more than $125,000. For every $1,000 increase in home values, more families cannot afford a home, with a lesser impact on lower-income homes than upper-income homes.
Gaines said with material costs rising, interest rates are likely to increase in time and the median home price is extremely important. The area has had continuously increasing median home prices as compared to other areas of the state and is running 6 to 7 percent below trend. We certainly appreciate Dr. Gaines’ willingness to share his insights with the council.
Public hearings set for April 28 and May 12
The regular council meeting on April 28 (7 p.m.) has been established for the second public hearing regarding water and wastewater impact fees. The council will receive input from anyone who wishes to speak, then will consider whether to implement the impact fees and if so, at what amount. The final public hearing will be May 12 (7 p.m.), when the council will consider an ordinance to implement the decision reached at April 28 meeting.
We hope this information is helpful. If you have any questions, please submit them on this blog and we will answer them as quickly as possible.
Director of Water Services